Ex-communist Europe

Estonia

Spots on the gloss

FEW outsiders know the Baltic states better than James Oates, a Scottish investment banker and blogger. So Estonians and their friends should take note of his sharply worded remarks about the Estonian government's treatment of Tallinna Vesi, the foreign-owned company that runs water and sewerage in the Estonian capital. Estonia has long prided itself on an exemplary reputation in everything from anti-corruption indices to rankings of business-friendliness. That has stoked smugness (never far from the surface in Estonia) and perhaps even a degree of complacency.

But as Oates points out, Estonia's record on treating big foreign investors is a bit spotty

... few of the major international investments in Estonia over the course of the past few years have gone smoothly. The American investment in Estonian Railways ended in acrimony and a more or less forced renationalisation. The American investors were caught between powerful Russian interests which limited their participation in the lucrative Russian freight market. However they also faced challenges from the Estonian political establishment that repeatedly kept trying to alter the terms of the contracts which the Americans had signed in good faith. In part this was perhaps because many Estonian politicians had developed grave doubts about the wisdom of Rail privatisation in the first place, but possibly it was also because they had fundamental misunderstandings about the nature and strategy of the business. The investment ended in a welter of arbitration and litigation, with the American investors more or less accusing the Estonian government of using force majeur against them. At that time, several allegations of corruption were also made against political and state figures in Estonia.

Now Tallinn Water, which used to be seen as a model example of privatisation, is embroiled in a similar row

The terms of the privatisation were clear and, although the pro forma return on investment was relatively low, United Utilities [the British owner] have made substantial investments in order to bring Tallinn Water up to international standards. Now, however, the company is facing political pressure to restructure and to reduce its prices well below the levels agreed under the formula set at privatisation. Furthermore, the company believes that specific legislation targeting Tallinn Water is being drafted- which it considers to be purely arbitrary. The company has repeatedly requested meetings with state officials and these have been repeatedly denied. The government appears to be dealing with Tallinn Water, as with other investors, on the basis of ultimatum and not negotiation. Putting pressure on investors by creating a kind of Kangaroo court of public opinion is dangerous populism.

Oates blames the "small and clannish nature of much of the Estonian political system" which can be "opaque to international investors". He also takes a brisk swipe at the Faustian pacts that some free-market politicians have entered into. For legal reasons I won't repeat his central allegation here. He concludes

The fundamental basis of a healthy free market economy and democratic politics is trust- and investors have found that they can not always trust the Estonian state not to break or unilaterally alter the contracts that they have entered into, or to properly investigate serious allegations of malpractice. Whether this is the result of corruption, bloody mindedness or just incompetence, it still amounts to the same thing: considerable damage to the country.

To be fair to the government, voters are quite cross about Tallinna Vesi and what they see as its inordinate price rises. Politicians have to listen to their electorate. But they also have to explain reality. The original terms of the privatisation may have been too soft, and the regulatory oversight too lax. But breaking a bad deal is often even costlier than honouring it. Estonia may find that the price of an acrimonious public lawsuit with a high-profile investor is more than just lawyers fees and compensation payments

Readers' comments

Many western "investors" over the past 2 decades have gone into Eastern Europe for the "fast buck", abusing their near monopoly positions. Banks are a case to point such as scandinavian ones in the Baltic States.. Many manufacturers have gone into eastern Europe with the deliberate intent of destroying viable local competitors.

As someone once said: "what a capitalist wants is maximum competition for his rivals and a monopoly for himself". Eastern European gvernments have, in the desperate drive for inward "investment", given away local industries and services to western corporations which behave in ways completely unacceptable in their own home countries....

First, there is no free market in water - we are talking about a private/public monopoly which needs oversight. The city water supply is a 1O minute walk from the city centre so there are no large infrastructure investments compared to a city like Los Angeles. Water prices in Tallinn are some of the highest in Europe, in one of the poorest countries in the Union.

I have met with the CEO and management of Tallinna Vesi, and my lasting impression is that they can barely conceal their glee with the profits the company is raking in, so it's completely disingenuous to claim water prices are too low, no matter how the company hides behind clever accounting tricks.

To be fair, the currupt city government is a major shareholder in Tallinna Vesi and their only interest is to serve the Mayor and his re-election. It's time for the State to step in and legislate.

Don't forget, like Estonian Railways where the Government forced new freight tariffs onto the system, by committee, the existing Government has forced heavy new taxes on top of the water costs. While it was reasonable to raise water tariffs to pay for new infrastructure, and make a decent profit, the new taxes on top of this have broken the system. Estonia is not only a flat country, but its economy is now flat and will stay in stagflation for a few more years, yet the government brags about collected tax revenue. Companies are struggling to pay debt, they just put it off and nothing happens in the short term thinking that a return to growth is around the corner and all will be well, but what will they do when it doesn't happen?